Rethinking Intel's greatest asset

Over the course of the next five to 10 years, expect dramatic changes in the operating model of the world's biggest chip vendor.

Intel Corp. is changing alright, but in such incremental and deliberate ways, the process may be near conclusion before its rivals, investors, and many industry analysts realize the extent of the dramatic turnaround the current management is trying to execute.

Over the course of the next five to 10 years, and certainly before the end of this decade, I expect dramatic changes in the operating model of the company, its end-markets, as well as competitors and customers. The changes will determine whether it stays atop the global semiconductor market as the biggest vendor by revenue.

For investors, the emerging Intel is already a puzzle, as evidenced in the weak valuation that followed the announcement of the company's fiscal fourth quarter results last week.

The Intel that is being refashioned out of the enterprise that has dominated the microprocessor market will be a manufacturing giant with unparalleled manufacturing resources and IP portfolio. It will become a leading semiconductor foundry and partner to many of today's OEMs -- and future OEMs -- in key telecom and data networking equipment markets. That Intel won't walk away from its traditional PC microprocessor business -- unlike when it exited the memory semiconductor market. Rather, it will continue as the dominant supplier to whatever remains of its traditional PC microprocessor OEM customer base, but without the current overwhelming dependence on them for a majority of its sales.

That's not all. Within the next five years, Intel will morph into a powerhouse supplier of chips to data-equipment companies, in addition to becoming one of only a few IDMs capable of offering extensive foundry-style services (semiconductor wafers) to leading OEMs in high-margin and highly specialized IT equipment markets.

In other words, in a very short time, Intel has the potential to become more recognized and rewarded for its services as a customized wafer foundry company than simply a vendor of chips to either the traditional PC or mobile device (tablets and smartphones) markets.

The foundation for that future is being laid right now, and (perhaps rightly so) Intel is being punished by investors for the decisions it has taken in pursuit of those goals. Rather than reduce capital expenditure in response to slowing sales, for instance, Intel is pouring more funds into infrastructure and next-generation manufacturing processes.

Though it forecasts "low single-digit percentage increase" in revenue due to challenges in the PC segment, in 2013, Intel plans to spend about $13 billion on capital equipment -- in furtherance of 14 nanometer and 10 nanometer plans. Capex for 2012 was about the same level as is now being projected for 2013.

it is indeed interesting if Intel is not investing in the Atom ecosystem enough...does this mean they have other alternatives to Atom? Maybe their high-end server processors frozen in architecture over next 5 years automatically becomes an Atom in a semiconductor process 5 years from now (such as a 7nm process)

The problem with Intel is that they still don't seem to have SoC chips that allow people to do embedded-class complete boards, in terms of size, power and cost. You can get Raspberry Pi, BeagleBoard/Bone, etc. ARM boards that run Linux and can be powered from a USB cable. Intel needs to invest in ecosystem enough so that such boards will be available for Atom.

Intel will always cater to the highest performance markets. ARM is divorced from semiconductor manufacturing process. This divorce is ARM's business model. Assuming that ARM can somehow eliminate Intel's process advantage and "take over" (which is not their goal either) the processor world flies against common sense. ARM can try to stay close to the process, but there is always the "fab secret sauce" that ARM will never have access.

As GF found out the hard way, transitioning from a few product fab to a foundry is much easier said than done. Intel is moving at a glacial pace in that direction, and herein lies the conundrum. When they move slow they learn on the go and don't get into a GF style mess. But by moving that slow they don't force themselves to confront the problems head on, and may implement a patchwork of solutions to their current systems that do not scale well. Only time will tell.